Tuesday, January 22, 2013

Eurozone - Obviously enjoying the silence

At the first Eurogroup meeting of the year, Eurozone finance ministers
gave the green light for the next tranche of the Greek loan and
appointed a new Eurogroup president but postponed all other crucial and
controversial issues.

Last night’s first Eurogroup meeting of the year reflected the general
mood of important policymakers in the Eurozone: relax and take it easy,
the worst of the crisis is over. Contrary to many meetings before, last
night’s meeting was not heavily-loaded with crucial decisions. In fact,
there were only two concrete decisions: i) Eurozone finance ministers
took was to give the green light for the next tranche of the Greek loan,
amounting to 9.2bn euro. 7.2bn euro will be for further bank
recapitalisations and 2bn euro to finance the budget. And ii) Dutch
finance minister Jeroen Dijsselbloem was officially appointed as
successor of Jean-Claude Juncker as Eurogroup president. On all other
issues, conclusions were postponed.

As regards Cyprus, the adjourned game continues. In fact, the Cypriot
government already (unofficially though) asked for help last summer.
Many Eurozone countries, above all the German, however, are hesitant to
offer financial aid to a country they suspect to be a money laundering
paradise. The German government was already reported as wanting to see
Russia chipping in to the bailout, extending financial aid provided in
2011 when Russia provided a €2.5bn euro loan to Cypriotic banks.

No official figures have been put forward yet but wire reportes refer to
a bailout package of around 17bn euro (which would be around 100% of
GDP). A €17bn bailout would mean that Cyprus' debt - currently over 70%
of GDP - would reach 170%, way more than the troika of international
lenders has ever accepted as "sustainable" for other bailout states. One
crucial question is therefore whether Cyprus, or better holders of
Cypriotic government bonds, should receive a haircut. A Greek-style
haircut could create new turmoil on bond markets as it would “aufheben”
the earlier promise that the Greek haircuts were one-offs (even if the
ESM Treaty includes the option of exceptional private sector
involvement). Moreover, as most bondholders are probably the banks
themselves, a Greek-style haircut could increase the recapitalisaiton
needs. However, a bailout out without any private sector involvement
should be hard to sell politically in some Eurozone core countries. As a
consequence, privatisations and eventually some baill-in of bank debt
owners could become part of any bailout agreement.

The other controversial issue of the coming weeks and months remains the
direct bank recapitalisation by the ESM once the single supervisory
mechanisme is up and running. Unsolved issues are obviously how much
money the ESM could spend on bank recapitalisation without jeopardising
the financial capacity to bailout more governments, whether ESM should
be the first or rather the final line of defence, whether the ESM should
be allowed to fund “legacy assets” (mistakes from the past) and whether
direct bank recapitalisation could be applied retroactively (for Spain
and Ireland).

Eurozone policymakers are obviously enjoying the calm on financial
markets. The copious time spent on and the obsession with the right
pronunciation of the name of the new Eurogroup president, Dutch finance
minister Jeroen Dijsselbloem,suggests that imminent pressure to deliver
concrete results has faded away. Let’s hope it does not lead to
complacency.